MPC Meets on Monday: What Should You Expect?

The Monetary Policy Committee (MPC) is set to meet on Monday 28^th January 2019 to determine the course of the key policy rate, the Central Bank Rate (CBR).

The committee last met on November 27^th, 2018 and maintained the CBR at 9.0 percent, citing a stable macroeconomic environment (inflation well anchored within the government target range and a balanced foreign exchange market).

Meanwhile, private sector credit growth (PSCG) remains low, at 4.4 percent in October. What should the market expect from the MPC?

“We expect the MPC to maintain the CBR at 9.0 percent in the January meeting due to the potential of perverse outcomes on growth ensuing from a policy change, the current stable macroeconomic environment and increasing uncertainty in the global economy,” said analysts from Genghis Capital.

Economic analysts are of the opinion that the key macro-economic indicators point towards unchanged monetary policy; stable inflation and currency, coupled with weak PSCG that continues to stifle growth.

CBK is yet to release data on PSCG for the months of November and December but we expect it to oscillate around the 4.4 percent reported in October due to a base effect, coupled with the two rate cuts in 2018 that served to aggravate the situation and further lockout risky borrowers.

Market analysts believe that the expected weak PSCG neutralizes expectations of a policy change due to potential perverse outcomes on growth.

The committee previously noted that the country’s economic output was close to its potential level, while there has been increased uncertainty in the global economy.

Following from this, and a relatively stable macro-economic environment that “we are currently witnessing, we expect the committee to adopt a wait-and-see approach.”

The shilling has been hailed for remaining stable and analysts expect it to be stable and oscillate between 101.00 – 103.50 levels against the dollar in 2019.

The shilling has had a 0.3% YTD appreciation against the dollar, while the usable foreign exchange reserves held at the central bank grew by USD 46Mn over the same period, to stand at USD 8.05Bn (effectively 5.27 months of import cover).

This is an indication that the Shilling has been fundamentally sounded over the last month. Moreover, the reserves continue to provide an adequate buffer in meeting the external obligations, as well as absorbing short term shocks.

With the expectation of a single Fed rate hike in 2019, coupled with strong diaspora remittances, pressure on the local currency remains subdued.

A key risk emerges from the external debt maturing this year, composed of:

• A USD 766Mn syndicated loan in 1Q19
• The USD 750Mn Eurobond I in 2Q19

The government will need to raise an estimated USD 1.5Bn for refinancing purposes, while it seeks to sustain adequate cover on the foreign exchange reserves.

Reports indicate that the government will seek to issue a USD 2.5Bn Eurobond before the end of the current fiscal year.

PSCG grew by 4.4% y/y in October 2018, with lending to the manufacturing, financial services and construction sectors advancing by 14.9%, 9.1%, and 7.2%, respectively, during the review period.

“In spite of the low PSCG, we estimate real GDP growth averaged 6.0% in 2018,” said analysts from Genghis Capital.